December 2012 Archives

Anyone following the manufacturing sector will tell you that one of the most exciting trends is the advent of 3D printing. Using complex software, it is now possible to "print" 3-dimensional objects essentially creating a "desktop factory". It really couldn't be easier - you input the proper calibrations into your computer, feed in the raw materials, and let the high-powered lasers in the printer do the rest. For manufacturing, this is an exciting turn of events - last year, my colleague Mark Mills, senior fellow at the Manhattan Institute, discussed the enormous potential that 3D printing has for disrupting the manufacturing status quo. 

More recently, it's spilled over into the biotech sphere. Autodesk, a CAD-software developer, just entered into a partnership with Organovo, a 3D bioprinting company, to develop software that can create architecturally accurate, living human tissue. Think about that for a second - software that enables the creation of human tissue. This represents a tremendous step forward in medical research. Though the technology is still far away, the logical endpoint is the ability to create replacement human organs or body parts.

There will be many challenges before this kind of technology becomes widely used - many barriers not the least of which are the safety and technological challenges stand in the way. With luck, FDA reform will ensure that regulatory barriers are minimized by then. 

Now that HHS has released all of their guidance concerning essential health benefits, the minimum benefits that insurance plans must offer to be sold in the state, nine states have received approval for their benefits package (out of 19 that have said they will build their own exchanges). Looking only at the nine approved so far, it becomes apparent that insurance will be no more affordable in most states than it was pre-Obamacare (one of the main goals of setting up health insurance exchanges is to offer consumers more choice among insurers). In fact, it is likely to be more expensive, and no more accessible than before.

State-Level Insurance Mandates


Previous Mandates

Proposed Mandates Under 
New Benchmark Plan

New York






District of Columbia





















Source: "Previous Mandates" from the Council on Affordable Health Insurance's 2011 report; "New Mandates" from National Conference of State Legislatures.

Under the law's essential health benefit requirements, HHS defines the categories of benefits, while states determine the specifics by selecting a benchmark plan for minimum coverage. For the most part, states have taken to choosing plans with more generous coverage than their previous requirements mandated, with D.C. making the biggest jump. Some, like Connecticut however, have actually reduced the number of total mandates, but at the same time have imposed requirements on insurers to commit to at least two years of participating in the exchange (note: D.C. has done the opposite, and has said that they will allow any insurer  that covers the minimum federal EHB to participate).  Thus far, as my colleague Avik Roy has noted, one large insurer has only committed to participating in a little more than a dozen exchanges; another only in ten. Fewer insurers means less competition, which means higher prices for consumers.

The market-influenced approach of health insurance exchanges is surely one of Obamacare's bright spots - if nothing else, a properly implemented exchange allows the individual to know exactly what kind of insurance policy they're purchasing , how much it costs, and what it covers. It encourages consumers to shop around for value, and encourages insurers to compete for people's business.

This isn't the approach that the ACA encourages, however.  Richer plans require higher premiums, which will in turn discourage young and healthy people from buying coverage, especially when they can pay a small penalty and buy the same coverage later if they become sick.

Given what we know about the approved exchanges to date (which, to be fair, isn't much), there isn't much reason to think that they will encourage robust competition. Increased state-level mandates and other requirements are likely to cancel out any potential for increased competition amongst insurers.

So what are we left with? For insurers, this is a new minefield of regulations to navigate. Insurers will likely avoid those exchanges with more mandates, and onerous rules and regulations. For consumers and taxpayers, this leads to fewer options to choose from and higher premiums.  A more flexible exchange format, encouraging more competition among insurers (Utah's clearinghouse model for instance has contracted to sell 140 plans already) and more choice for consumers, would be a far superior approach.

Over at Xconomy, Brian Patrick Quinn of Vertex Pharmaceuticals (the company that developed Kalydeco) discusses the need for a strong American manufacturing sector:

Manufacturing - as many others have argued - is vital to many strong businesses and to all strong societies, even in the 21st century.

Quinn makes a strong case for a resurgence in American manufacturing, making the important distinction that modern-day manufacturing, is not the bleak, Dickensian dystopia that it was in days of yore. And while we hear every day about China's comparative advantage at manufacturing, we tend to forget about our own edge - technology.

Vertex for instance, started construction on a new production plant; one that is more efficient and capital-intensive than the old-fashioned, labor-heavy factories abroad. It allows higher quality drug production at significantly lower cost, and as Quinn rightly notes, having the research lab next door allows new discoveries to be implemented more quickly.

This advantage isn't unique to Vertex either; the entire American pharmaceutical industry is ever more tech-savvy and innovative. The personalized medicine revolution underscores the need for a tight knit relationship between production and research, in order to adapt on the fly - something that factories abroad may have difficulty with. And this is essential in supporting innovation:

Perhaps the most valuable trait of the manufacturing sector is its capacity for supporting innovation. In fact, experience shows that innovation and manufacturing processes are too interdependent to work well when they're separated...

But supporting American manufacturing requires more than just sitting back - reducing regulatory barriers and appropriate push/pull incentives will be critical.  Uncertainty about the FDA's future course makes these investments more risky, and makes it less likely for investors to see a particular company as a 'winner'. After all, to have a manufacturing plant, you need to have something to manufacture.   On this front, having strong and consistent leadership from Commissioner Hamburg is a plus, as is the FDA's willingness to reform clinical trials requirements for antibiotics, accelerate access to "breakthrough therapies", and rationalize regulation in other ways.  While companies can innovate anywhere in the world, assuring rapid access to America's large pharmaceutical market is certainly an attraction in locating R&D and manufacturing facilities in the U.S., close to regulators.

States are doing their part as well.  For instance, Massachusetts, for instance, has funded a 10-year $1 billion life sciences initiative to support the existing biotech cluster in the region. Similar public-private partnerships at the local level can give companies incentive to establish (or maintain) manufacturing plants in the region.

At the federal level, reforming the decrepit American tax system will also make the U.S. a more competitive location for global headquarters (and consequently manufacturing). After all, pharmaceutical manufacturing requires appropriate funding from venture capitalists and other investors who can choose from an international menu of tax regimes.  Our tax system, at a minimum, shouldn't be chasing them away.  

Let's hope Washington gets the memo.

We're just at the dawn of molecular medicine. And it's going to change everything.

Take cancer treatment, for instance. Next generation therapies for cancer - including new molecular-targeted therapies, nanotechnology enhanced chemotherapy, gene therapy, and cancer immunotherapy - have the potential to "disrupt" tradiational cancer treatment paradigms, radically improving outcomes and (in the long run) sharply lowering the costs of treatment.

Researchers and the media have been talking about the revolution in "personalized medicine" for more than a decade now, but that just means that the most promising therapies are just beginning to reach the clinic now, with even more powerful therapies in the pipeline behind them.

As these treatments reach the mainstream, they will make many of our current health care debates obsolete. Every few years, we wring our hands about the cost of new drugs, and ask how pharmaceutical companies can charge so much for treatments that only extend life by a few weeks or months.

Of course, incremental innovations are better than no innovation at all, and new some cancer therapies, like Gleevec, are truly "game changers", and for a handful of other types of cancer (like breast cancer and testicular cancer) survival rates have skyrocketed as companies and researchers have substantially improved both diagnostics and treatments. But for most solid tumors, and some blood cancers, the prognosis is still unremittingly grim and the treatment costs are very high.

That prognosis, however, is likely to change, as both the effectiveness of new treatments rises and their cost plummets as new technologies mature. For instance, the New York Times this week chronicled how researchers at the Children's Hospital of Philadelphia genetically re-engineered leukemia patient Emma Whitehead's own T-cells - using a deactivated version of the virus that causes AIDS, no less - to attack her cancer, acute lymphoblastic leukemia. This was a last ditch experimental treatment, because Emma's cancer had resisted every other treatment her doctors had tried. The Times explains:

To perform the treatment, doctors remove millions of the patient's T-cells - a type of white blood cell - and insert new genes that enable the T-cells to kill cancer cells. The technique employs a disabled form of H.I.V. because it is very good at carrying genetic material into T-cells. The new genes program the T-cells to attack B-cells, a normal part of the immune system that turn malignant in leukemia.

The altered T-cells - called chimeric antigen receptor cells - are then dripped back into the patient's veins, and if all goes well they multiply and start destroying the cancer.

The T-cells home in on a protein called CD-19 that is found on the surface of most B-cells, whether they are healthy or malignant.

What is even more remarkable is that when Emma developed a life-threatening complication from the immunotherapy, her doctors were quickly able to run a battery of diagnostic tests to isolate the specific immune response that was causing the problem (an overproduction of interleukin-6). They then used another drug (off-label, normally used for rheumatoid arthritis) to save her life. The treatment has since been used successfully in several other patients who developed the same complication.

Researchers might have to administer another dose or two of the therapy later, or might not - they can easily track her cancerous B-cells to make sure the disease remains in check. Her genetically altered T-cells, however, will remain in the body, roaming hunter-killers seeking out signs of cancer. (Although, as the Times nnotes, the engineered T-cells attack all of Emma's B-cells, cancerous or not, since they both express the same cell surface protein. However, if researchers can identify a more specific cancer protein signature they can spare the healthy cells by making the engineered T-cells even more precise.)


The work at CHOPs is a stunning advance for cancer immunotherapy and personalized medicine, since the T-cells must be tailored for each patient, rather than brewed in enormous vats, like traditional drugs. The drug company Novartis is backing the commercial development of the technology, so it can eventually be scaled up for far more cancer patients - and eventually applied to other cancers, including solid tumors. (The first successful application of cancer immunotherapy, although it appears to be less successful as a therapeutic, is Provenge for advanced prostate cancer.)

As we suggested earlier, another bright spot in this story is the cost of the modified cell therapy, about $20,000 per patient, according to the Times. Compare that to the cost of chemotherapy. One drug, Clolar, can cost $68,000 for two weeks of treatment for relapsed pediatric ALL. Bone marrow transplants, another ALL treatment option, can cost hundreds of thousands of dollars and long hospital stays.

Another advantage of tailored immunotherapies (like other targeted therapies) is that they can show efficacy rapidly in smaller clinical trials, lowering the cost of development and allowing companies to press FDA regulators for rapid marketing approval in light of the high benefit-risk ratio for patients who've run out of other options. Doctors will then - as Emma's did in her case - fine tune them on the fly as diagnostic and treatment options improve around them.

CHOPs and Novartis are helping to pioneer a completely different model of drug development, and drug approval that can help de-risk the entire industry and enable rapid follow on innovations. While industry is going through the doldrums now, Emma's saga is a welcome sign that the future of the industry - and the science underlying it - is bright.

Of course, for Emma Whitehead and her parents, just having a future to look forward to is enough. The next time you hear someone worry about the cost of new cancer treatments, you might want to mention her story to them.

You may have heard that the U.S. is about to plummet off of a fiscal cliff. Policymakers may disagree about how to bring the nation's finances into balance, but one thing they don't disagree about are the forces pushing us towards the abyss: in a word, runaway health care spending.

As former Obama OMB and CBO director Peter Orszag quipped in 2010, "it is no exaggeration to say that the United States' standing in the world depends on its success in constraining this health care cost explosion; unless it does, the country will eventually face a severe fiscal crisis of crippling inability to invest in other areas."


What is true at the federal level is also true at the state level. State Medicaid expenditures account for almost a quarter of state budgets today, second only to education funding. Medicaid expenditures are also projected to rise faster than state revenues, increasingly crowding out funding for other critical state priorities. Addressing the shortfall may require sharp tax increases, painful budget cuts, or both.

You'll also get little opposition from either side of the aisle that America isn't getting the best value for our outsized health care spending, currently at 18% percent of GDP and rising. According to a 2011 article in JAMA, "in just 6 categories of waste, over treatment, failure of care coordination, failures of execution of care processes, administrative complexity, pricing failures, and fraud and abuse, the sum of the lowest available estimates exceeds 20% of total health care expenditures." The same report estimated annual loses from fraud and abuse in Medicare and Medicaid at up to $98 billion annually.

There are two basic arguments about how to tackle the problem of rising costs, and they split largely (but not entirely) on ideological lines.

One, approach, generally favored on the left (and largely embraced in the Affordable Care Act), is to attack the problem on the supply side by increasing government's role in setting prices and defining insurance packages, along with driving delivery system reforms. Supply side reforms include bundled payments for Medicare and Medicaid; Medicare's new Independent Payment Advisory Board (IPAB); price controls on reimbursements for health care goods and services (Medicare's DRG pricing system; ACA cuts to provider reimbursements); stringent rate reviews for insurance carriers; and even heavier-handed market controls like bans on physician-owned hospitals, and requiring state pre-approval for new health care related facilities through certificate of need laws.

The other approach, generally favored on the right, is to focus on improving the functioning of health care markets on the demand side. This means increasing consumers' "skin in the game" for routine health care costs through consumer-directed health plans (CDHPs) and Health Savings Accounts (HSAs); capping or eliminating the tax exclusion of employer-provided insurance and replacing it with a standard deduction or tax credit for health insurance; and shifting other public programs, like Medicare, towards a defined contribution approach where seniors would shop from a competing menu of health care plans with a defined level of public support. Proponents of more consumer involvement in health care also support efforts to improve transparency on provider prices and quality, so that consumers can seek out the most effective and efficient providers (or in the case of insurance, the most efficient networks).

Whatever you may think about the Affordable Care Act, our recent election guaranteed that it is going to be implemented, more or less. The choice before the country now is how that implementation will be structured, and how to make that implementation sustainable given the massive cost explosion that the ACA - whatever its other merits - has done little to address. As we've argued elsewhere, many of its key provisions will likely make the health care cost problem worse, because it heavily subsidizes consumption of traditional, first-dollar insurance for families making up to about $92,000 a year, or four times the Federal Poverty Level.

But implementation, and America's mounting fiscal woes, also provides an opportunity for genuine dialogue and compromise. We're beginning to detect a growing acknowledgement on the center-left that more consumer side reforms are needed and inevitable, particularly in the ACA and, on the right, that mitigating the ACA's worst flaws could turn out to be both good policy and good politics - especially for an electorate that is increasingly frustrated by Washington's inability to tackle America's most serious challenges.

That conversation should be helped by a thoughtful and balanced paper from Richard P. Nathan, a senior fellow at the Rockefeller Institute in New York. The paper, How to Rein in Health Care Costs: Empower Consumers, is a concise tour de force in health economics and public choice theory that makes the case for incorporating more consumer-driven insurance choices into both public and private insurance programs, including the ACA.

First, Nathan recognizes that we'll need "at least one more round" of health care reform to truly tackle the cost problem.

Taken together, Medicare and Medicaid account for 25 percent of federal spending; they are projected to account for one-third in 2021. Medicaid also accounts for a huge and growing share of state budgets, and in some states local budgets as well. Focusing on Medicare, Jonathan Gruber estimates that in order
"to put the program on a solid footing for the foreseeable future would require imposing a 15 percent payroll tax. Every person in America would have to pay 15 percent of their wages to the government, basically doubling the tax burden on American families. ...

An analysis by Eugene Steuerle of the Urban Institute shows the share that Medicare taxes and premiums cover "of the care provided to the average recipient ranges from 51 to 58 percent over time." Steuerle says "[for] the rest we borrow from China and elsewhere, and we use up ever-larger shares of income tax revenue, leaving ever-smaller shares for the government functions. Bottom line: without reform, current workers would continue to shunt many of their Medicare costs onto younger generations."

Nathan is right on the mark. And to paraphrase Stein's law, if something can't keep going on forever, it won't.

While broadly supportive of the ACA, Nathan is skeptical that supply side reforms can adequately grapple with the endemic cost problems in American health care:

Provider-value social engineering shouldn't be the main line strategy for dealing with the fiscal imperative of fast-rising health care costs. Politicians are good at giving social benefits but not so good at taking them away. Likewise, leaders in government public health care programs tend to come to their jobs with a concern about and belief in the programs they are responsible for. Government
does not have the necessary penetration -- nor the leverage commitment, or clout needed-- to reform the huge health care industry.

This is a variation on Mancur Olson's famous theory of collective action. In a nutshell, it's very hard for large groups of individuals to organize for broad social aims - even when that organization would produce large gains for society. On the other hand, small, highly motivated special interest groups have powerful incentives to organize and lobby government for wealth transfers. In the case of health care, this means that providers (hospitals, nursing homes, physicians, home health care workers, etc.), consumer groups (like the AARP), and public sector unions (like the SEIU) are well positioned to push for increases in health care spending, with politicians reaping the rewards from campaign contributions and energized voting blocks.

Although Democrats are more associated with the welfare state, both parties have facilitated the expansion of public funding for the medical-industrial complex from a mechanism to help the poor and disabled to get access to care, to an entitlement program for the middle class and older (and more affluent) consumers. Republicans, after all, created the Part D Medicare drug benefit, and Republican governors, like George Pataki, in New York, have worked hard to leverage federal dollars to support local state Medicaid providers.

Unsurpringly, when it comes to meaningful reforms of Medicare and Mediciad, the track record of the federal government has been mostly disappointing. (And when it comes to weeding out fraud and abuse in those programs, the record is downright disgraceful.)

While supply side reforms are necessary, Nathan believes, "in the long run creating and managing competition in the health care marketplace is the better approach for achieving health care cost control by mobilizing price-consciousness in a way that at the same time protects consumers from having to pay the high costs of catastrophic care."

Baumol's Disease

Nathan illustrates the tremendous challenges facing even the best intentioned and determined supply side reformers by discussing Baumol's Disease - i.e., the problem of rising salaries and costs in industries that are labor intensive but in which there is little productivity growth, like health care. He recounts a story of how then Senator Daniel Patrick Moynihan tried (unsuccessfully) to convince Hillary Clinton and her aides working on health care reform in 1993 to take the problem of cost escalation in public health care programs seriously. Moynihan later told reporters working on a book recounting the collapse of the Clinton plan that:

Here I have it, sir, handing over charts and statistical analyses. Data. Documents for you. Medicaid doubled in eight years of the Reagan administration, then doubled again in four years of the Bush administration...Assuming geometric progression, sir, what day is the day on which we reach the point when Medicaid doubles in one day?"

Supply side health care reforms, in the long run, inevitably wreck themselves on the twin rocks of interest group politics (because powerful interest groups are always pressing for program expansion) and large informational asymmetries (because regulators and policymakers are critically dependent on pricing information supplied by the very industries that they are trying to regulate into efficiency). Nathan sums up the problem beautifully:

Within the health industry, temptations for game playing sometimes defy imagination, and very probably exceed the capability of government agencies to provide full and in-depth oversight and enforcement. Up-coding of services, ordering more tests (some of them in self-owned facilities), excessive consulting, and overly frequent appointments-- all add to the argument against government social engineering as the major strategy for cost constraint.

The Cure

Consumer driven health care plans cut the Gordian knot of Baumol's disease by sharply reducing the ability of policymakers and lobbyists to direct allocations of health care resources. (Indeed, David Kessler makes the case for Medicare reform precisely on these lines in a recent National Affairs article.)

In CDHPs, consumers shop for the types of care they are willing to pay for out of pocket or with savings from HSAs. Providers must adapt and become more efficient, or go out of business. Insurers continue to provide coverage against catastrophic expenses, which is really what you want - but because insurers would prefer that you not become catastrophically ill, they also focus more on prevention and chronic disease management, and on triaging the relatively small number of very complex cases to the most efficient providers. CDHP's thus have the capacity to promote both supply and demand side reforms.

Nathan buttresses his arguments about the utility of consumer driven care by noting how many private sector companies have shifted to CDHPs, and how government programs - like Medicare Advantage (also called Part C), the Federal Employees Health Benefit Program (FEHBP) and Medicare Part D already operate in a consumer-directed fashion, in a managed but otherwise fairly competitive marketplace.

The ACA contains elements of these arrangements, particularly through their state insurance exchanges, but nascent ACA regulations are unduly hostile to CDHPs, and are already undermining their ability to compete on state exchanges.

Still, surveying the scale of current public and private experiments in managed, but consumer-directed competition, Nathan is cautiously optimistic:

The marketplace is doing its job. Insurance companies are making changes in their policies and practices to win market share. Governments are doing similar things to manage competition as a way to rein in their spending on employee benefits.

To repeat (even though it should be evident), one can view these kinds of developments in varied ways. Program advocates can be expected to be unhappy. On the other hand, faced with growing concern about public debt and deficits other observers can view health policy changes like those discussed in this paper as unavoidable, but necessary.

A Word of Caution

Nathan offers a number of recommendations for encouraging the uptake of consumer driven insurance policies, both through the reform of the employer provided insurance market, Medicare, and Medicaid, and the ACA. They are all worth considering.

The caveat I would offer is that it is vitally important to encourage the widest possible competition among insurers and competing health care networks available to consumers. Not only HSAs offered by traditional insurers, but concierge style health plans offered by physicians' groups, tiered network plans, Accountable Care Organizations, and any other innovative insurance designs that meet minimum actuarial values should be available to consumers.

Having one market - at either the federal or the state level - will likely reduce the rapid competition and experimentation that is needed in consumer driven insurance markets. It is probably better to arbitrage competition between both state exchanges and a federal option to prevent providers or interest groups from capturing either.

The productivity revolution driven by Moore's Law in other areas of the economy is rapidly enabling computers to help doctors make faster and more accurate diagnostic decisions - and should eventually enable primary care physicians and even nurses to take over duties once relegated to expensive specialists. Other technologies like gene therapy offer the prospect of sharply reducing the labor and cost involved in treating even complex diseases like cancer. Accelerating the substitution of labor for technology can and surely will be enhanced by increasing consumer's role in health care markets.

Moving Forward

A first step in increasing the availability of CDHPs would be revising the ACA's insurance market regulations that effectively penalize CDHPs. Next, policymakers should target federal subsidies at lower-cost consumer directed plans in both exchanges and in the employer market (ideally, this would be achieved by harmonizing the tax exclusion for employer-provided insurance with exchange subsidies through a universal tax credit or deduction).

Reform of public programs should folllow. For Medicaid, every state could be offered a capped allotment along the lines of the successful Rhode Island experiment, encouraging states to incorporate more patient incentives and consumer directed plans for the vast majority of relatively healthy Medicaid enrollees, as suggested in a recent paper by my colleague Russell Sykes.

Medicare reform similarly can begin creating a level playing field for competition between insurers and Medicare fee-for-service, an idea that has supporters on both sides of the aisle.

The argument against these reforms, as Nathan recognizes, is not that they wouldn't work. They certainly would - along the way reducing employment and resources flowing to the health care sector, or at least the inefficient parts of it. Expect providers and affected interested groups to howl in protest.

Of course, those resources could flow back to the private economy, or could be used to leverage critical public sector infrastructure investments in other sectors - creating new constiuencies for more consumer directed reforms.

Nathan's paper gently reminds policymakers that the health care system is addicted to taxpayer spending and policy micromanaging in ways that make American health care far less efficient and far more expensive.

Encouraging the widespread uptake of consumer directed health plans is one way of curing Baumol's disease that would allow both the left and the right to get what they want - for the left, universal coverage, for the right, more consumer-directed health care. And for everyone else, lower costs and greater value for their health care dollars.

Is there a constituency for this win-win-win scenario? We shall see.

Last Friday, the Supreme Court decided that it will review the pending FTC v. Watson Pharmaceuticals case that deals with the controversial "pay for delay" practice. The way it works is that brand name drug manufacturers pay a sum of money to generic manufacturers to delay the production of generic versions of brand name drugs. On its face, it certainly appears to be anticompetitive - a company is using its financial resources to keep others out of the market - not very different from forming a trust/monopoly. If it were that simple, however, this issue would have likely been resolved years ago.

The FTC's argument is as expected:

These drug makers have been able to sidestep competition by offering patent settlements that pay generic companies not to bring lower-cost alternatives to market.  [They] block all other generic drug competition for a growing number of branded drugs.  According to an FTC study... [they] cost  consumers and taxpayers $3.5 billion in higher drug costs every year.

The response of the pharmaceutical industry, however, is a bit more nuanced and presents an interesting dilemma - the official response is that the attempt to ban pay for delay settlements presumes that such payments are always anticompetitive, and as such ignores the "scope of the patent" rule, which makes an exception for payments that don't exceed the patents exclusionary potential. These should be important considerations for the court, but there are other, economic reasons for the frequency of pay for delay settlements.

An important consideration is that the effective life of pharmaceutical patents has markedly fallen over the past several decades. A drug patent is valid for 20 years in the U.S.; however, most companies have a much lower "effective" life for their patents because of the time spent in development and receiving regulatory approval. While in the 80s the effective patent life hit a high of around 14 years, by the mid-90s it fell to around 11 years - compared to products in industries with no regulatory approval which have an effective life of around 18.5 years. This means that pharmaceutical companies are pressed to at least break even on a new drug in a shorter span of time; while patent law allows companies to recoup up to 5 years of patent life lost during drug testing and FDA review, this is capped (arbitrarily) at a maximum of 14 years.

That effective patent life has fallen, leads to one of the reasons for the fall in patent life - the Hatch Waxman Act of 1984 that allowed generic drug manufacturers to file a claim against a patent prior to its expiration. Though the law greatly increased the number of generic drugs available to consumers (a huge financial benefit), it helped set the stage for protracted patent litigation between generic manufacturers and brand name innovators - with generics having little to lose (since they haven't started manufacturing) and brand name companies having a chunk of their business on the line. Pay for delay should be seen as a natural response to the economic conditions created by the law, the inherent uncertainties of litigation, and as a vehicle for less expensive settlement of patent disputes.

Another more nuanced point should be made - it is likely that the gains from pay for delay are priced into brand name drugs. That is, with a ban on pay for delay, the prices of brand name drugs would likely go up during the effective patent period. Thus, the FTC's claim that pay for delay practices cost consumers $3.5 billion annually should be taken with a grain of salt as they seem to focus on the increased cost of not having generic drugs on the market sooner, without looking at the potential change in costs of other brand name drugs as innovators increase prices to compensate for an even shorter (potential) effective patent life.

This shouldn't be seen as an outright defense of pay for delay - it certainly appears to be highly anticompetitive. However, rather than more lawsuits, legislative remedies may help to ameliorate the situation, especially if it improves incentives for innovation in the industry, which is the point of patents to being with.

For instance, if the cap on restoration time to patents were to be lifted (or extended) a good portion of the incentive for pay for delay would potentially disappear. On the regulatory side, if the FDA streamlined clinical trial requirements it would reduce total development costs and time, thus increasing effective patent life without lifting the cap.

What will the court decide? It's hard to say. Whatever the decision, it will likely affect not only drug companies, but consumers and incentives for future innovation.   Recognizing the trade-offs is the first step in developing a good solution.

Paul Howard and Stephen Parente

We've received several comments about our 12/6/2012 piece in USA Today regarding the National Health Insurance Exchange Hub as prescribed by the Patient Protection and Affordable Care Act (ACA) and we'd like to clarify several issues. Our piece states 'when the constantly updated information is combined in a central data hub, the potential for abuse is staggering.'

Every op-ed goes through editing, and this one certainly did as well, and so we would like to clear up one potential misunderstanding: that there will be a giant database available with 300 million US citizens information available for all who wish to abuse it. This is not what we meant.

In fact, our original version goes into more detail: 'They (data inquiries to the Hub) occur, in discrete steps and with your permission, (similar to when) you apply for a mortgage.' Furthermore, 'to make matters even more complex, the exchange has to access this data in real time (if the government simply kept a file coordinating all of this data on you, it would be an even bigger invasion of privacy).'

It's not clear exactly how the data hub will operate, and that is our expressed concern. Ideally, the hub should function as a switch that routes information but does not retain the person-identifying information it is routing. Major credit card purchases today operate this way: where a retail vendor, at the point of purchase, uses your credit card to link a variety of data about you to make sure you are not a credit risk and then clears you for purchase of your 70" LCD TV for the holidays. This approach minimizes privacy risks and provides good data security.

The federal data hub should operate this way, coupled to either a State or Federal insurance exchange as well as to the Social Security Administration, Treasury Department, Homeland Security and Department of Justice, et al. Operating this would create a fire-and-forget data system that would instantaneously link to an abstract piece of information and then delete it to prevent it from becoming a privacy concern. Major credit bureaus have been providing these services for nearly two decades, and if there ever has been a privacy breech, it is not from a pure data switch.

Having said how you could provide reliable data privacy protection, no one has said how the data hub will actually operate. Greater transparency is needed, and a frank acknowledgement that the ACA's posted deadlines should take second place to reasonable data concerns. This isn't a political point, and isn't meant to impinge anyone's motives inside HHS.

HHS' job is to implement the law. And, much as we may dislike an assortment of the law's underlying provisions (and we have repeatedly expressed longstanding concerns about its impact on insurance markets, the federal budget, etc) HHS staff are doing exactly what they are supposed to do and facing constraints they can't always control. They are doing so in a politically charged environment - and crashing headlong into the constraints of scarce human capital, complex regulatory requirements, and a massive IT project with literally no technical precedent.

We believe that Congress has a legitimate oversight responsibility to ensure that - whatever your feelings about the ACA - the final product is trusted, functional, and secure for all Americans. They should take that responsibility seriously - and the Administration should help them execute that responsibility.

The report is out. With storm clouds circling the fiscal cliff, it's refreshing to present, for a change, some good news. The FDA has approved 35 novel drugs in 2012 - the same as it had in 2011 and matching the highest approval rate in roughly a decade. These approvals included 10 cancer drugs, 9 drugs for orphan diseases, and one non-oncology personalized drug for cystic fibrosis (Kalydeco).

One of the more impressive results is that nearly 70 percent of the approved drugs were approved in the U.S. first - a tribute to the FDA's efficiency compared to its international competitors, and perhaps a welcome sign that we may yet be able to maintain out innovation advantage.

In terms of approval speed, 25 of the 35 (71 percent) of the approved drugs went through one of three FDA expedited approval pathways - Fast Track, Priority Review, and the most flexible , Accelerated Approval. The drugs in these pathways had enormous success, and most were approved on the first cycle.

Under Commissioner Hamburg's leadership, the FDA beginning to dismantle some of the innovation-stifling barriers that plagued agency in the past - yet it's too early to celebrate.  . As we wrote recently, costs of drug development continue to rise, threatening the long term viability of the industry. And not all drug classes are created equal - over 50% of the FDA's new approvals were for specialty indications, rather than primary care indications like diabetes or obesity.

In other words, 2 good years in a row is a sign of good momentum for the agency and welcome news for patients, and policymakers try and build these trends.   .

In particular, and as I've written before, the FDA should use this as impetus for fresh guidance on antibiotic development, to pre-empt the growing antibiotic resistance. Reducing the regulatory barriers by easing clinical trial requirements would do wonders.

More broadly, the FDA can expand their Accelerated Approval pathway to other drugs (it was used mainly for AIDS drugs) for life-threatening conditions. This would ease data gathering requirements (companies could gather data based on a surrogate or provisional clinical endpoint without needing to have a fully validated clinical endpoint like death or irreversible morbidity), and by reducing the time to approval, drugmakers would be better equipped to recoup their R&D costs, spurring additional investments.

So two cheers for the FDA.  Let's see if there will be a hat trick next year.

Off-label drugs-- those used for indications other than what the drug was originally approved for-- have been used for many years. Most of us have probably benefited from this practice, but despite this, it has been illegal for a pharmaceutical sales rep to even mention a possible off-label use of any drug to doctors.

That changed Monday, when the Court of Appeals for the Second Circuit in Manhattan curtailed the FDA's authority to limit what sales reps are allowed to say to doctors about their company's drugs, throwing out the conviction of a sales rep who was found guilty of selling a narcolepsy drug for off-label indications. The court's argument was based on First Amendment rights, and although I don't really know or care about the constitutionality of this. I just know a good idea when I see one.

I'm sure the anti-pharmaceutical activists will be howling about this one for quite some time. I can already see the headlines: "Big Pharma Money Buys Corrupts Courts" or "A Legal Win for Pharma; A Loss for Us."
And of course, there will also be countless analyses about how the First Amendment was not designed to permit sales reps to "illegally push" drugs that have not been approved for a particular use upon doctors and their patients. But until now, this was the law.

I never understood the law in the first place. It just doesn't make sense.

Once the FDA approves a drug for a particular use, a doctor can legally prescribe it for other indications. It happens all the time. It has been estimated than about 20 percent of all prescriptions are written for a non-approved indication. Given this, why should it be illegal to pass along information to doctors, letting them know about new treatments?

Well, it shouldn't. And there are good reasons for this.

First of all, drug reps are an important source of information for many doctors, who may not have the time to take courses or read medical journals. There are probably quite a few instances where the drug rep is the only source of new drug information for a physician. The rep supplies information. It is then up to the physician to decide whether to use the drug or not.

Since off-label use is already a common practice, doctors have either decided to try this on their own, or have gotten some information from somewhere else. Where? A colleague on the golf course? A medical journal? From the patient himself? Who knows? Why not a sales rep? If you believe that they simply lie about everything to meet their quotas (and I certainly don't), they can just as easily lie about the new approved drug that they are selling. I don't see much of a difference between the two, nor do I believe it is common.

As long as off-label information exists, why should it not be transmitted? It is the doctors who will determine what is best for their patients and they will decide what to do with the information that get. No one will force them to use anything they are not comfortable with.

Second, any off-label drug has already been approved for something else, meaning that it has already gone through an exhaustive safety review that was required for its approval in the first place (yes-- it is imperfect, so don't bother reminding me about Vioxx).

So, the use of an approved drug for condition X is not likely to be any more dangerous than using it for disease Y, since the FDA has already deemed it sufficiently safe to use in the first place. (Of course there are exceptions--no doctor wishing to hold onto his license will prescribe a cancer drug for a backache).

But that cancer drug may be very useful in treating noncancerous diseases, and this highlights some of the real benefits of off-label drug use--something most people are unaware of.

Certain chemotherapeutic agents are effective for treating autoimmune diseases, such as lupus, multiple sclerosis and rheumatoid arthritis--three god-awful diseases that may not respond to other therapies.

And there are many others. Singulair, originally approved for asthma is used off-label for chronic obstructive pulmonary disorder (COPD). Antidepressants are used to treat chronic neuropathic pain, as is Neurontin, originally an epilepsy drug. Seroquel, and anti-psychotic drug is used as an adjunct in treating depression.

The beta-blocker heart drug Inderal is also used for treating migraine headaches, stage fright and PTSD. And Zofran, which revolutionized cancer chemotherapy by significantly reducing nausea and vomiting is used off-label for treatment of hyperemesis gravidarum, a severe form of morning sickness, which put Kate Middleton in the hospital this week.

To me, the entire concept that providing information to doctors needs to be artificially constrained is based on the presumption that we need to be protected from greedy and dishonest drug reps and doctors. I don't buy it. Yes, I'm sure there are some bad apples out there (as there are in any profession), but on the whole I believe this decision will provide a substantial net benefit to patients.

A broad look at the state of biotech investment activity reveals an industry that is somewhat stagnant, but at least consistent.

total biotech investment.png

Source: PWC MoneyTree; Red shading is for recessions as defined by NBER

There is certainly reason to be concerned that biotech's investment stream may dry up; stagnant investment activity is likely a result of fewer drug candidates / medical devices in development, increased risk, falling returns, or some combination of the three. This means that fewer drugs and devices will be make it to the FDA for review, and even fewer will make it to market. While 2011 was a record year for drug approvals, the trend of stagnating investment gives should give pause to anyone concerned about the future health of the industry.

Even more pressing than the broad stagnation of biotech investment is the state of first sequence investment - angel investor activity - in the industry. In order to keep the industry growing, new startups are needed to replace companies that either grow large or are gobbled up by the big pharma giants. This process of "creative destruction" keeps the industry fresh, competitive, and innovative. However, despite the relatively stable volume of investment going into biotech, the number of first sequence investment deals (the number of deals directly related to angel activity) has plummeted.

first sequence investments biotech.png

Source: PWC MoneyTree; Red shading is for recessions as defined by NBER

While the fall in angel investments appears similar to the four quarter drop in early 2002, the latest plunge is at a new 13-year low and has been more consistent. Indeed, as Luke Timmerman at Xconomy noted last month, even the big biotech clusters have been suffering.

Certainly, there are many factors at work in the complex biotech market that influence investment decisions - but chief among them is the enormous cost and high regulatory uncertainty associated with new product development  For instance, the FDA has required large numbers of patients for diabetic drug candidates to rule out rare cardiovascular risks for those medicines, as well as promoting impractical clinical trials guidelines for new antibiotics.   There are some welcome signals from FDA leadership that they understand their negative impact on innovation and investment and are (slowly) beginning to incorporate more innovation-friendly regulatory practices.  In fact, the FDA has partnered with the Medical Device Innovation Consortium, an industry group, to work on slashing red tape and accelerating review times. Part of this push might also be the result of increased regulatory international competition; the EMA, for instance, has offered clinical trials guidance  for antibiotics that have drawn praise from industry and independent researchers - and made the EU a more attractive market for antibiotic drug makers.    Creating a more attractive environment for early investments into biotech will undoubtedly require a broad mix of "push" and "pull" incentives, including transferable tax credits along with faster and more transparent regulatory pathways for both incremental and groundbreaking technologies. 

Without focused reforms, the future of medical innovation may be in peril.   




And state insurance commissioners are not happy. From Politico:

Friday's new rules included a 373-page HHS regulation that covers risk adjustment in the exchanges, cost-sharing limits and user fees for the federal exchanges; a 122-page Office of Personnel Management rule that spells out the guidelines for the Multi-State Plan Program; and the Internal Revenue Service put out a 42-page rule on the Medicare payroll tax that will be charged to high-income earners to help pay for the law.

But the sudden deluge of regulations doesn't change the fact that insurance commissioners have been kept waiting for months, and they say the delays have made their jobs significantly harder.

Until now, most of the loudest complaints about the lack of guidance on the Affordable Care Act came from Republican governors. But at the insurance commissioners' conference this week, the officials in the trenches implementing the law -- even in states that have been its strongest supporters -- quietly expressed the same concerns. ...

"We're still very much depending on getting further guidance from HHS. There are still some major gaps," said Washington State Insurance Commissioner Mike Kreidler, whose state has long pursued its own exchange. "The timetable that we have is going to be a real challenge. ... We're still plowing ahead but without some of this critical guidance from the federal government, it's going to be very difficult."
Very, very difficult indeed. My friend Steve Parente and I basically said the same thing last week. And last year too, for that matter. Stay tuned for more developments.

At Econ Talk, Marcia Angell discusses big Pharma with Russ Roberts. I think she gets a lot wrong. Here is one exchange on innovation.

Angell: The question of innovation-you said that some people feel, economists feel, [the FDA] slows up innovation: The drug companies do almost no innovation nowadays. Since the Bayh-Dole Act was enacted in 1980 they don't have to do any innovation....

Roberts: But let's just get a couple of facts on the table...[The] research and development budget of the pharmaceutical industry is, in 2009, was about $70 billion. That's a very large sum of money. Are you suggesting that they don't do anything-that that's mostly or all marketing? That they are not trying to discover new applications of the basic research? It seems to me basic research is an important part. Putting that research into a form that can make us healthier seems to be a nontrivial thing. You think they are-what are they doing with that money?

Angell: If you look at the budgets of the major drug companies-just go to their annual reports, their Security and Exchange Commission (SEC) filings, you see that Research and Development (R&D) is really the smallest part of their budget. If you look at the big companies you can divide their budget into 4 big categories. One is R&D, one is marketing and administration; the other is profits, and the other is just the cost of making the pills and putting them in the bottles and distributing them. The smallest of those is R&D.

Notice that Angell first claims the pharmaceutical companies do almost no innovation then, when presented with a figure of $70 billion spent on R&D, she switches to an entirely different and irrelevant claim, namely that spending on marketing is even larger. Apple spends more on marketing than on R&D but this doesn't make Apple any less innovative. Angell's idea of splitting up company spending into a "budget" is also deeply confused. The budget metaphor suggests firms choose among R&D, marketing, profits and manufacturing costs just like a household chooses between fine dining or cable TV. In fact, if the marketing budget were cut, revenues would fall. Marketing drives sales and (expected) sales drives R&D. Angell is like the financial expert who recommends that a family save money by selling its car forgetting that without a car it makes it much harder to get to work.

Later Angell tries a third claim namely that pharma companies do no innovation because their R&D budget is mostly spent on clinical trials and, "it's no secret how to do a clinical trial." I find this line of reasoning bizarre. I define an innovation as the novel creation of value, in this case the novel creation of valuable knowledge. Is Angell claiming that clinical trials do not provide novel and valuable knowledge? (FYI, I have argued that the FDA is overly safety conscious and requires too many trials but Angell breezily and nastily dismisses this argument). In point of fact, most new chemical entities die in clinical trial because what we thought would work in theory doesn't work in practice. Moreover, the information generated in the clinical trials feeds back into basic research. Angell's understanding of innovation is cramped and limited, she thinks it begins and ends with basic science in a university lab. Edison was right, however, when he said that genius is one percent inspiration and ninety-nine percent perspiration-both parts are required and there is no one-way line of causation, perspiration can lead to inspiration as well as vice-versa. Read Derek Lowe on the reality of the drug discovery process.

Angell infuses normative claims to the industrial organization of the pharmaceutical industry. Over the past two decades there has been an increase in the number of small biotechnology companies, often funded by venture capital. Most of the small biotechs are failures, they never produce a new molecular entity (NME). But a large number of small, diverse, entrepreneurial firms can explore a big space and individual failure has been good for the small-firm industry which collectively has increased its discovery of NMEs. The small biotechs, however, are not well placed to deal with the FDA and run large clinical trials-the same is also true of university labs. So the industry as a whole is evolving towards a network model in which the smaller firms explore a wide space of targets and those that hit gold partner with one of the larger firms to pursue development. Angell focuses in on one part of the system, the larger firms and denounces them for not being innovative. Innovation, however, should be ascribed not to any single node but to the network, to the system as a whole.

Angell makes some good points about publication bias in clinical trials and the sometimes too-close-for-comfort connections between the FDA, pharmaceutical firms, and researchers. But in making these points she misses the truly important picture. Namely that new pharmaceuticals have driven increases in life expectancy but pharmaceutical productivity is declining as the costs of discovering and bringing a new drug to market are rising rapidly (on average ~1.8 billion per each NME to reach market). In my view, the network model pursued on a global scale and a more flexible and responsive FDA, both of which Angell castigates, are among the best prospects for an increase in pharmaceutical productivity and thus for increases in future life expectancy. Nevertheless, whatever the solutions are, we need to focus on the big problem of productivity if we are to translate scientific breakthroughs into improvements in human welfare.

Originally posted on Marginal Revolution

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